Surging Ethereum Futures Premium Signals Potential Price Spike For Ether
The year began on a high for most of the top virtual currencies following the bearish sentiments triggered by the collapse of the FTX exchange in November 2022. But Ethereum (ETH) has lost 14.7% of its value since reaching a high of $2,120 on April 16, 2023.
However, there are two ways to assess how people feel about investing in Ether, and both indicate that traders are more optimistic than they have been in a year. Nevertheless, it is still worth analyzing whether the recent uptick in sentiment is due to Bitcoin (BTC) attaining the price range of over $34,000 on October 24.
Reasons For ETH Bullish Sentiment
One reason why investors in ETH derivatives are so excited is that the broader crypto market is anticipating the approval of a Bitcoin exchange-traded fund (ETF) in the United States. According to Bloomberg analysts, the changes made to the ETF proposals for spot Bitcoin are a positive sign of progress and future approvals.
They believe this development is expected to boost the price of crypto assets across the board. It is worth noting that the 2019 remarks attributed to the current US Securities and Exchange Commission (SEC) chair, Gary Gensler, also influence this issue.
A recently resurfaced video quotes Gensler during the 2019 MIT Bitcoin Expo, stating that the SEC’s stance was “inconsistent” at the time because they had turned down many applications for spot Bitcoin ETFs. Gensler added that the regulator’s decision is surprising given that ETF products based on futures (which do not involve actual Bitcoin) have been available in the United States since December 2017.
Another reason why Ethereum derivatives investors may be feeling optimistic is the upcoming Dencun upgrade, which is scheduled for the first half of 2024. This upgrade is set to improve how data is stored for layer-2 rollups, resulting in lower transaction costs.
Additionally, it aims to position the network for future implementation of sharding, a method of processing tasks in parallel, as part of the blockchain’s “Surge” strategy. Earlier this week, Ethereum co-founder Vitalik Buterin affirmed that independent projects at the base level are moving steadily and gradually becoming part of the Ethereum ecosystem’s layer-2 scaling solutions.
The co-founder also pointed out that existing rollup fees are prohibitively expensive for most users, particularly for non-finance applications.
Challenges Ahead
Meanwhile, some Ethereum competitors are shutting down as their developers realize that maintaining a complete record of a network’s transactions is highly costly. For instance, SnowTrace, a popular tool for exploring the Avalanche (AVAX) blockchain, has shut down.
Ava Labs’ Phillip Liu Jr., a top-level executive at the company, highlighted the difficulties users face when validating and storing data on single-layer chains. This frequently causes unexpected problems because such validations need much processing power.
Also, the Theta Network team encountered an “edge case bug” last month while upgrading a node, causing production on the main chain to halt for several hours. Thus, huge fees and processing capacity restrictions are the Ethereum network’s current problems.
Ethereum Derivatives’ Bull Sentiment
In assessing the core aspects of the Ethereum network, it is crucial to understand the optimism behind ETH traders in the derivatives market. First, the Ether futures premium is at a 12-month peak. The annualized premium, called the basis rate, typically ranges from 5% to 10% in a robust market.
However, data indicates a surge in the demand for contracts for this futures premium, rising from 1% on October 23 to 7.4% on October 30, above the threshold signifying optimism. This rise followed a 15.7% ETH price increase within two weeks.
Another useful analytical metric is the 25-delta skew for Ether options. This metric fell to -16% on October 27, its lowest level over 12 months.
Nonetheless, protective sell options were trading at a discount during this period, indicating a high degree of market optimism. Ultimately, the reasons behind the optimistic attitude of Ether investors in the derivatives market are only partially evident.
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